BIS urges faster rate hikes to tame rampant inflation

Bloomberg

Central banks need to start raising interest rates to control inflation and may have to act faster than in the past, the Bank for International Settlements (BIS) said.

“Tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks,” the BIS said in its annual report published on Sunday in Basel, Switzerland. “Central banks may have to be prepared to raise policy rates at a faster pace than in previous tightening episodes.”

While policymakers in Asia and Latin America are already raising borrowing costs to damp price pressures, rates remain near record lows in the world’s largest developed economies.

Central banks in the US, the UK and Japan have signaled they intend to keep that stimulus in place for some time, with only the European Central Bank moving to gradually tighten credit as inflation risks increase.

“Global inflation pressures are rising rapidly as commodity prices soar and as the global recovery runs into capacity constraints,” said the BIS, which acts as a central bank for the world’s central banks. “These increased upside risks to inflation call for higher policy rates.”

With UK inflation running at 4.5 percent, more than double the Bank of England’s target, the BIS said “one wonders how long its current policy can be sustained.”

Crude oil prices have gained 20 percent in the last 12 months, putting pressure on companies to increase wages and pass on higher costs to consumers.

BIS general manager Jaime Caruana said global headline inflation had risen a percentage point to 3.6 percent since April last year.

At the same time, short-term interest rates adjusted for inflation “have actually fallen in the past year, from minus 0.6 percent to minus 1.3 percent globally,” he said in a speech in Basel on Sunday.

“The world economy is growing at a historically respectable rate of around 4 percent,” Caruana said. “The resurgence of demand has put concerns about deflation behind us. Accordingly, the need for continued extraordinary monetary accommodation has faded.”

The BIS said that in “some advanced economies” policy tightening still needs to be balanced against the “vulnerabilities” associated with balance-sheet adjustment and financial sector fragility.

Still, “undue delay in the normalization of the monetary policy stance entails the risk of creating serious financial-market distortions,” it said.

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